Question

Specialty Chemicals Ltd. makes a special powder coating for metal surfaces sold in envelope-style pouches. The main ingredient of this powder coating is a chemical known as X43. Information concerning the purchase and use of X43 follows: 

Purchase of X43: The raw material X43 is purchased in 50-kilogram containers at a cost of $75 per kilogram. A discount of 2% is offered by the supplier for payment within 10 days, and Specialty Chemical takes all discounts. Shipping costs. which Specialty Chemicals must pay, amount to $250 for an average shipment of ten 50-kilogram containers.

Use of X43: The bill of materials calls for 800 grams of X43 per pouch of powder coating. About 5% of all X43 purchased is rejected as unsuitable and is not used to make the powder coating. Thus, on average the 480 grams of suitable X43 required for each pouch of powder coating represents 96% of the amount that initially goes into production.

 

Required:

1. Compute the standard purchase price for one gram of X43.

2. Compute the standard quantity of X43 (in grams) per container that passes the final inspection.

Answer 1

Required 1.

Cost per 50 kilogram container..............................................$3,750.00

Less: 2% cash discount.......................................................................75.00

Net cost..............................................................................................3,675.00

Add: freight cost per 50 kilogram container

        ($250 ÷ 10 containers)............................................................25.00

Total cost per 50 kilogram container..................................$3,700.00

 

Standard cost per kilogram purchased........................................$74

 

Required 2.

X43 required per pouch as per bill of materials......................480 grams

Add allowance for material rejected as unsuitable

          (480 grams ÷ 0.96 = 500 grams;

           500 grams – 480 grams = 20 grams)..............................20 grams

Standard quantity of X43 per saleable pouch.........................500 grams

Standard cost per kilogram purchased = $74

Standard quantity of X43 per saleable pouch = 500 grams